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The Mental Mistakes We Make With Retirement Spending

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Dr. Statman is the Glenn Klimek professor of finance at Santa Clara University’s Leavey School of Business and the author of “Finance for Normal People: How Investors and Markets Behave.


Imagine spending a lifetime acquiring habits that offer the promise of a longer, happier and more fulfilling life. Then imagine that to have that fulfilling life, you suddenly must abandon all those habits.

Not easy, is it? But that’s what happens when people go from work to retirement, from saving money to spending it. Too often, the same personality traits that facilitate saving for retirement become impediments when it is time to spend that money. The mental tricks we employ while working become mental mistakes when we move into the next phase of our lives.

The result isn’t merely a nuisance. It can lead to a much less satisfying retirement—one in which people spend too little money and spend it on the wrong things, as well as take on too much investment risk. It can greatly reduce the happiness of later life, a time when many people have the time and money (and wisdom) to enjoy their lives in a way they never could before. 

So, how can we recognize and conquer those old habits when they’re no longer working in our favor?

Conscientiousness is a doubled-edged sword

Who doesn’t want to be conscientious? Conscientious people are likely to say they don’t buy things on impulse, or spend too much money, or buy things they don’t really need. Conscientiousness is the personality trait most closely related to academic achievement, job performance, marital stability and longevity. Conscientious people accumulate more wealth than less conscientious people, even after accounting for differences in income, education and cognitive ability. 

This all sounds great. And it is—until it collides with retirement. Conscientiousness then threatens to keep people who have enough money to enjoy life from spending that money. As one man wrote in a blog about retirement saving and spending: “I bought in early to the idea of saving for retirement over consumption, perhaps without really thinking much about it. Along the way...I became frugal. Changing now would be traumatic for me.”

The lesson here is as difficult as it is obvious: We should beware of crossing the line from frugality to miserliness.

It’s all how you frame it

The mental tools of framing and accounting help us accumulate savings during our working years. We frame money into distinct mental accounts of “capital” and “income,” and follow the rule of “spend income but don’t dip into capital.” We set automatic transfers from our income mental accounts (wages and salary) to capital mental accounts (401(k)s and the like). 

Yet these mental tools can backfire in retirement when it is time to spend. Think of a retired 65-year-old with a $1 million stock portfolio. He needs an annual $40,000 in addition to Social Security benefits to maintain his standard of living. Assume he earns $20,000 a year from a 2% dividend yield on his stocks, and $20,000 a year from a 2% increase in the value of his stocks. He can comfortably spend $40,000 a year during 30 years of life expectancy. But such spending requires crossing the boundary that separates income from capital mental accounts and dropping the rule against dipping into capital.

Many retirees can’t cross that boundary. So they spend much less than they can afford to, or they attempt to increase income, which means greater risk. They may buy high-yield bonds—which have a higher default rate—or stocks promising high dividends—which are concentrated in particular industries, especially banking and utilities, raising risk by decreasing diversification.

There are better ways to ensure prudent spending in retirement while allowing investors to maintain the psychological comfort of a wall between capital and income. One is by “managed payout” funds that pay a percentage of their value, such as an annual 4% “income,” in installments specified by investors. This “income,” in reality, is composed of a combination of dividends and capital.

The Mental Mistakes We Make With Retirement Spending

Another method involves required minimum distributions, or RMDs. These government-mandated withdrawals from defined-contribution retirement accounts start at age 70½. The annual RMD rate at age 70½ is 3.65%, increasing to 5.35% at age 80, 8.77% at age 90, and 15.87% at age 100.

By absolving people of the responsibility for deciding when to cash in their savings, RMDs can serve as prescriptions for spending more than our mental barriers would otherwise allow.

The pain of regret

There’s another reason so many retirees find it difficult to draw on capital, however much they can afford to. It’s because spending capital—as opposed to income—increases the likelihood that they’ll suffer the searing pain of regret.

Compare John, who buys a laptop computer for $1,399 with dividends received today from shares of his stock, with Jane, who buys the same laptop today with $1,399 in proceeds from the sale of shares of the same stock. Now suppose that the share price rises 3% tomorrow. Jane is much more likely to suffer the pain of regret because she chose to sell her shares. For John the company’s decision as to when to pay dividends was out of his hands. 

Of course, Jane would feel pride if the shares’ price fell by 3% tomorrow rather than rose, but the pain of regret that accompanies a 3% loss exceeds the joy of pride that accompanies a 3% gain.

To get around this emotional block, retirees should find alternative ways to tap their capital—ways that won’t burden them with the potential pain of bad choices. They could, for instance, set up a strict schedule of investment sales, such as at the end of each month, removing the responsibility for choosing the right times for sales. Or they can use the managed-payout funds mentioned earlier.

You’ll die sooner than you think

People don’t judge their lifespans very well—a miscalculation that can leave them once again underspending in retirement.

According to data from the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.6. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.



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A study of people’s beliefs reveals, however, that while young people underestimate their longevity, older people overestimate it. For instance, 68-year-old men have a 71% chance of living to 78 but believe, on average, that they have an 82% chance of reaching that age. Such overestimation means that people also overestimate how much money they will need in retirement—and underestimate how much they can spend.

I’m not suggesting people spend every penny they have by age 95. But most people have a lot more leeway to spend than they realize, and their misunderstanding of longevity only exacerbates their underspending.

Don’t leave the best for last

We have a tendency to put off spending for enjoyment, thinking both that it is financially prudent and that delaying will increase our gratification. 

That is wrong in both cases. Take a cruise when you are 70 if you wish, but don’t delay it. Evidence indicates a pronounced tendency for diminished consumption beyond age 70, even among those with ample financial resources. A household headed by an 80-year-old spends 43% less than a household headed by a 50-year-old. Older people suffer physical limitations that make them less capable of spending money. And for personal reasons, such as the death of a spouse, they are less inclined to spend.

Spending isn’t just about the price

We often get advice from family and friends to spend more while we can. Spend at fancy restaurants, they say. Go on a cruise. But the better advice is to identify what can bring us joy, even if it departs from what brought us benefits in the past. 

The Mental Mistakes We Make With Retirement Spending

A couple I know never flew business class unless upgraded or paid with frequent-flier miles, because tickets cost as much as five times coach fare. That made sense when they were younger and trying to accumulate savings. But they hated traveling coach, especially as they got older. Eventually, they realized they could afford to fly business class for international trips. For them, that extra fare was worth much more than, say, going out 10 times for $100 meals at a pricey restaurant.

In contrast, another couple recently bought a new car. They easily could have afforded a luxury car, but chose an ordinary one and donated the difference to a favorite charity. They saw the purchase of a luxury car as a kind of status-seeking they didn’t want. Instead, they derived expressive and emotional benefits from their donation.

Similarly, for many people during their work years, some spending is motivated by social status—“keeping up with the Joneses.” When we’re saving for retirement, such comparisons make sense, because it pushes us to strive to get ahead.

But that kind of comparison hangs on way too long into our retirement years. It only makes us spend too much, and on things that don’t give us true happiness. At this point, we shouldn’t be striving to make more, to achieve status. We should be striving to get the most joy out of what we already have accumulated.

It is better to give with a warm hand than with a cold one

Many people believe that the time to bequeath the majority of their estate is when they die. Part of it is out of fear of running out of money (often irrationally). Part of it is simply habit. But waiting deprives them of the joy of giving.

A father asked me for advice whether to forgive a substantial loan he and his wife made to their son for law-school tuition. He is at the beginning of his career and at the beginning of forming a family. They could easily forgive that loan without imposing hardship on themselves. It is money that would be going to their son in any event.

Why, I asked, would they insist on having him pay it back now, when he probably needs it the most, and they could enjoy the act of giving it the most? 

Don’t try to beat the market

A lot of people look ahead to retirement and think: I’ll have so much free time, I’ll finally be able to manage my investment portfolio and not pay somebody to do it.

Resist that temptation. For one thing, trading by amateur investors is akin to baking by amateur bakers: You’ll never bake a good loaf, because you’ll be opening the oven door every few minutes.

What’s more, investors are notoriously bad at evaluating the risk they are taking with their portfolios. That’s because they are still thinking the way they did when they were in the workforce. They don’t realize that the wealth of young people is mostly in “human capital”—the income they are likely to earn during their working years. Younger people can take more risk with their retirement savings because human capital will cushion their fall.

The wealth of retired people, however, is mostly in retirement savings. They can’t afford much risk, because they have no human capital to fall back on. Placing part of their retirement savings into a well-diversified portfolio of broad-based mutual funds is prudent because such a portfolio isn’t likely to lose all its value. But placing all retirement savings into a venture, such as a retail store or new franchise, is less than prudent because all its value can be lost.

As an old commercial advised, you don’t have time to earn it anymore. Buy an occasional lottery ticket instead.

Dr. Statman is the Glenn Klimek professor of finance at Santa Clara University’s Leavey School of Business and the author of “Finance for Normal People: How Investors and Markets Behave.” Email: reports@wsj.com.

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No problem. I am just glad some of you actually are interested in reading them. This one offers an interesting perspective. I had mentioned in previous posts that after 30 years plus of a savings mindset, I was having trouble spending my money now that I am retired. This article caught my attention. I need to plan that trip to Spain, Italy ,France, and Greece sooner rather than later . But it will be difficult for me to get use to the idea of spending what it has taken me 30 plus years to save and after  dealing  with all the obstacles and frustrations I had to fight along the way trying to keep my money in my pocket instead of giving it all away to high fee crooked salespeople and other financial institutions.A dilemma.

Sorry, that second to last  sentence is a run on.

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14 minutes ago, edietel said:

I love your hatred of paywalls :-)


Thanks Tony!

Well I can beat most of them but I am sure they are working on it:) Someday my way around them will be figured out and stopped.


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Would it be helpful to, perhaps, think about it this way: the cost of your trip will (almost certainly) be less than those crooked salespeople would have taken from you, had you not changed how you invest. In other words, had you stayed with them, they would have been taking a European vacation on your dime.

It's time you reward yourself for years of good choices!!

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It wasn't really 30 plus years of good choices. I was victim over and over again partly because of the lack of good choices and my inaccurate belief that maybe the next insurance company 403b investing option could be the better choice. Then I also invested too aggressively outside the 403b not really understanding the risk I was taking .I had to learn the hard way that the system was/is stacked against us and still is against most of you if you don't understand it.. Its fortunate that you guys have this site. I only discovered 403bwise about 10-12 years ago. In those years I was able to fix my portfolio and somewhat reform my school system's  choices. If every educator and non profit employee  would spend some time here we could truly  reform the 403b mess but as Steve's book states we are dealing with powerful interests that are not going to give up their stranglehold without a fight . I can not begin to tell you the lies and half truths I was told by these peddlers.

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There is a fundamental truth to this article; switching from saving to spending can be difficult.

However, I believe some people are just hard wired to save; it's just who they are. I suspect they'll have a much more difficult time of it because spending just isn't in their personality. However, if you're saving because it is a necessary behavior to achieve your goal of financial independence then I think you'll have an easier time transitioning. When the goal changes it is easier for a goal-oriented person to change their behavior accordingly.

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Death is also a motivator to transition to spending. When of somebody close dies unexpectedly from a disease that came from nowhere is a brutal reminder of the obvious in that we not only don't live forever, but we may not even make it to 84 for men and 87 for women. 

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 The way I look at it is  whether you spend it or not ,it offers you a less stressful  more secure  life-style knowing that if you need it you have it. That in itself is a health benefit that might make you live longer. Stress in general is a killer. Money or lack of money is a stress factor at any age but when you are older it can be devastating. My dad lived to 92 my mom until 84 . I know all about sickness coming on quickly as does Steve. My mother developed a super fast Alzheimers that killed her in a short time. Had she had the slower type of the disease , the nursing home stay would have wiped out my dad's savings. My mom went first.Her twin sister in Italy however  is alive and doing well. I have many relatives in Italy who are in their early to  mid nineties who are active and healthy. Of course there, their,medical costs are covered. We don't have that luxury here. I wonder if that accounts for their longevity.

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This is something I worry about...  I grew up with very little, but to my parents credit never really realized  how little that was.  We always had enough.   My husband's family grew up with more and we're raising our son with the "more" as well.   Watching my husband's parents travel and buy the things they need in their retirement without a financial burden is educational to watch.  I'm very much hoping that the saving I do now will help alleviate the worry of spending later.    My maternal grandmother is still kicking at 95 relatively independently and my paternal grandmother was in her early 90s when she passed. Her oldest daughter just passed away at 93 but  she had dementia at the end.  If I retire at 67, I might need a savings to last 30 years. 

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